As the Trump Administration settles in to the Oval Office in late January, one of its foremost objectives should be to provide clarity on its policies, according to Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia who was formerly dean of Wharton and president of the University of Delaware.“My biggest concern is concern,” said Harker. “The biggest risk we face is uncertainty. If you ask every business leader, their biggest concern is: ‘Whatever changes occur, just do them gradually. Let us adapt.’ They have been in a world of change for a long time. That’s not going to go away; we can’t take away change…. Their biggest concern is if something hits them, and they simply can’t or don’t have the time and the resources to adjust.”Harker and Wharton finance professor Jeremy Siegel discussed the outlook for the U.S. economy in 2017 on the “Behind the Markets” show on Wharton Business Radio on SiriusXM channel 111. Siegel hosts the show with Jeremy Schwartz, director of research at WisdomTree.

Harker seemed to echo the sentiments at the Federal Reserve, as recorded in the minutes of the Federal Reserve’s Federal Open Market Committee meeting on December 13-14 that were released on Wednesday. “[The FOMC members] pointed to a number of risks that, if realized, might call for a different path of policy than they currently expected,” the minutes noted. “Moreover, uncertainty regarding fiscal and other economic policies had increased. Participants agreed that it was too early to know what changes in these policies would be implemented and how such changes might alter the economic outlook…. Moreover, many participants emphasized that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate.”Siegel said Trump’s victory “has changed everything for the Fed as well as for the economy.” He agreed that many basic policies of the Republican Party, many of which Trump supports, “are very positive for the market.” He noted that while the financial markets were prepared for a Hillary Clinton victory, they adjusted quickly to the reality of Trump as president and rallied ahead. “I thought it would take them a little longer to get from the negatives to the positives,” he said. “It took about six hours before they said, ‘Wow, this could be very, very good.’” Stock prices and bond yields showed “a tremendous rise.”

Siegel added that the financial markets were relieved that following his victory, Trump took a softer line on issues such as U.S. relations with China and Mexico than he did during the campaign. “The first thing he didn’t say was he was building the wall [on the border with Mexico] and cutting off trade with China, which of course scares the market, as it should…. He has been much more conciliatory on those, and he appointed people who are globalists and understand the importance of trade.” It also helped that Trump seemed to embrace the Republican Party agenda and was willing to meet with Paul Ryan, speaker of the House of Representatives, who had reluctantly endorsed Trump.

According to Harker, part of the market reaction was simply about resolving the uncertainty around the election period, clarifying that he was speaking in his personal capacity and that his remarks do not reflect those of the Federal Reserve or the FOMC. “I hear from the market that people are optimistic, but until the specific policies come in play that we can model and analyze, it’s hard to say if the market has over or under reacted, or whether it is going to boost or not boost economic growth.”Harker pointed to the so-called Partisan Conflict Index that the Federal Reserve Bank of Philadelphia publishes, which monitors “the degree of political disagreement among U.S. politicians at the federal level” as it is reflected in media reporting. “When [partisan conflict] is heightened, it hurts economic development and economic growth,” he said. “Any uncertainty is bad for the markets.” He noted that the index stayed elevated all the way through the election. However, he predicted that the index would decrease after post-election data is factored in.According to Siegel, the prospect of lower corporate taxes in the Trump regime was a big factor in the 6%-8% rise in the S&P index. “We don’t know if it will be effective in 2017 or 2018, but analysts expect a 10% increase in corporate earnings as a result of lower taxes,” he said. “That in and of itself can explain a 10% rise in markets.” The second factor that explains the surge in the index is the hope for fewer regulations, he noted. Also at work are expectations that the Affordable Care Act will be repealed, as well as a loosening of regulations on the financial sector. Another factor is the expectation of infrastructure spending, pushing up some stocks and commodities related to that, he added.Corporate tax reform “is important for the U.S. to be globally competitive,” Harker said. The possibility of U.S. firms being asked to repatriate taxes will have a positive impact, he added. (During his campaign, Trump said he planned a one-time tax holiday of a 10% tax instead of the existing 35% to lure U.S. companies to repatriate money held abroad.) It remains an open question as to what will replace the revenue lost as a result of that tax holiday. “Another open question is how the total corporate tax package – not just corporate taxes – gets resolved over time.”

Regulatory Easing

“Positive momentum” exists on how people feel about reduced regulations, Harker said, but he added that much depends on how that plays out over time. The Republican Party has announced several proposals, but they are yet to be finalized. “What do those packages look like, when it is all said and done — that is the key for me. Right now, it is too early to tell.”

Siegel pointed to the prospect of changes to the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act that was enacted after the financial crisis. “There are some good things and some bad things in Dodd-Frank,” he said. “Could we selectively undo parts of that act and spur the banking system again?” Harker agreed that “there are some good parts about Dodd-Frank that we need to maintain.” He offered the example of the provisions in that statute for the resolution process for failing banks. “Whether it is Dodd-Frank or in other venues, we need to have a very clear path when a bank gets into trouble – how do we quickly resolve that issue, and not let it linger for too long,” he said. “When it lingers for too long – as we saw in the 2007-2008 financial crisis – the contagion effects are quite severe.”The regulatory regime for well-performing banks is also getting easier than before, said Harker. He gave the example of the Federal Reserve Bank of Philadelphia. It oversees the Third District (covering eastern Pennsylvania, southern New Jersey and Delaware), which he described as predominantly one with community banks. “In any crisis, the pendulum swings one way, and then it starts to correct the other way,” he said. “We’re already seeing it. The period between examinations is getting longer for community banks that are in good standing; we don’t have to do it every year; we can do it every 18 months. We can start to relieve some of the regulatory burden for them.”Harker said the Fed by itself can do little to dismantle regulations in a way that can bring about more certainty in the markets, in response to a question from Siegel. “It’s up to Congress,” he said. “But I do know we don’t want to create these unintended consequences, removing everything, when there are things that we know are working well, or other things that just need enough time to see if they work well or not.”Keeping an eye on global banking systems is another Fed objective. The Basel Committee on Banking Supervision said on Tuesday that it has postponed a meeting to discuss tighter capital adequacy standards from January 8 to March 1 after European Union officials opposed some of the proposals. Harker said the Fed is monitoring that situation, especially as it relates to Italy. He added that for now, it did not see any significant contagion effect from that on the U.S. financial system.

Border Adjustable Tax

Siegel noted that some Republicans in the House of Representatives are proposing “radical” legislation on the so-called “border adjustable tax.” That plan calls for a 20% tax on imports and a special tax exemption for income from exports. That would be “devastating” for companies such as Wal-Mart, he said. Harker expressed his inability to comment specifically on that. “In this globally interconnected world, where you have these globally interconnected supply chains, anything that would happen would be disruptive,” he said. “The question is, is that disruption worth it?”Harker said recent data showed that about 40% of the value-add on the goods the U.S. imports from Mexico is actually produced in the U.S. “So highly engineered products produced in the U.S. go across the border [to Mexico] and then come back,” he said. “That is happening across the globe, so we have to disintegrate these integrated supply chains to get an answer. It’s not as though we are simply importing something that is produced solely in China or solely in Mexico. These parts are going back and forth. That’s what gives me pause about having an opinion on this until you disentangle those supply chains.”

Growth and UnemploymentAccording to Harker, “The Fed monetary policy is an extremely blunt instrument. We have one tool, essentially, [which is] the Fed funds rate…. We don’t create economic growth. Good monetary policy creates the conditions for economic growth to occur. It doesn’t stifle it.Economic growth happens by real companies and real communities with real people working there. We need to focus on those policies and us facilitating and having people understand [what we do].”According to Siegel, the Fed has faced unfair criticism questioning its role in fostering growth. “The Fed is not responsible for the fact that we’ve had a measly 2% a year growth. In the long run, it is productivity [that matters],” he said, noting that along with a big slowdown in population growth, productivity has fallen. He wondered if that might be due to over-regulation or a downturn in innovation.Siegel noted that notwithstanding Trump’s proposals, and the jump in stocks and in bond yields, the real GDP growth in 2017 over 2018 is projected “at a measly one-tenth percent.” That could be interpreted in three ways, he said. One is that expectations are low on what Trump could do. Two, much depends on working through Trump’s policies when there is more clarity on them. Three, maybe long-run growth isn’t much more than that. “If [Trump] pushes [to get economic growth], we’re going to have to [increase] interest rates to keep the labor market in line and stop inflation,” he said.Harker said that in his view, the growth rate in U.S. GDP in 2017 would be 2.3%, settling back to 2.1% in 2018 and 2019. Those projections do not factor in any economic stimulus that the Trump Administration and the new Congress may inject, he added. Without any additional stimulus, he projected a dip below the natural rate of unemployment. “Barring some change in productivity, we would see some inflationary pressures, and we are starting to see some of that right now, anecdotally,” Harker noted.Regarding the labor force, Harker said one threshold for action would be when the unemployment rate dips significantly below a natural rate to 4.7% or 4.8%. The natural rate is the long run rate at which there won’t be any particular inflationary pressures that arise, Siegel explained. The unemployment rate declined by 0.3 percentage points to 4.6% in November 2016, based on data released by the Bureau of Labor Statistics (BLS) on December 2. The unemployment rate for December was “little changed” at 4.7%, the BLS said when it released its latest data today (January 6). The Fed expects the unemployment rate to dip in 2018 and 2019 to 4.5%, but Harker said his estimate is 4.4%. “We need to be adaptive to the policy framework outside of monetary policy,” Harker noted. “As those things change, we have to change our forecast and our path.”

Funds Rate Outlook

Siegel asked Harker about the “steepness” he wants in raising interest rates, or the frequency of it between Fed meetings. The “dot plot” for 2017 suggests closer to three rate increases, while last year saw only one increase, Siegel noted. The Federal Reserve’s so-called “dot plot” published after every meeting reveals the funds rate projected by the members of the Federal Open Market Committee. In its last meeting on December 12, the Federal Reserve increased its benchmark federal funds rate by 25 basis points from 0.50% to 0.75% in a unanimous vote.“I’m in for three [rate] increases [in 2017],” Harker said. “However, that’s subject to a lot of uncertainty. As the policy uncertainty resolves itself, we’ll be able to see whether it is three, two or four. Right now, given where the economy is, and at least our best estimate of the growth path we are on, I think three [increases] is appropriate.” However, that is subject to revision, he added.Siegel noted that policy watchers are now pegging inflation at 0%, which may have to do with “slower long-term growth and maybe slower long-term productivity growth.” Harker said he does consider those factors in his push for a steeper normalization path for interest rates. “It fundamentally comes down to one thing – how do we raise economic growth in the country?” he said. “Economic growth is productivity growth plus growth of the labor force. Neither of those issues is in the [control] of the Federal Reserve System. We are there to support that growth through monetary policy, but these are policies that are outside [our control]. It’s in states, in communities and cities, it’s [about] moving productivity and bringing highly skilled people into the workforce, coming from inside the U.S. and actually outside the U.S.”One looming controversy is the Republican call for the Federal Reserve to follow the so-called Taylor Rule for setting interest rates or at least benchmarking them. Conceived by John Taylor, academic and monetary theorist and former undersecretary of the Treasury, the rule sets a strict mathematical relationship between inflation, output and the Fed Funds Rate, apart from whatever else might be happening in the economy. “The Republican Party has proposed legislation that the Fed should look at that and report to Congress when they deviate from that,” said Siegel. “The Fed is fierce about its independence and bristles at being told how to conduct monetary policy.”“At every meeting, and in preparation for every meeting, we look at all these rules,” Harker said. “There’s no one rule. There’s a Taylor Rule, the optimal control rule, etc. We look at those carefully to see what they say about the appropriate path or policy of the Fed funds rate. That said, to dictate policy by one rule – first, you have to pick the rule. You may just have the wrong model. Next, you are putting data into the model that you know gets revised over time – that’s imperfect.”Harker said models that supposedly guide interest rate decisions incorporate “data that has a lot of noise around it – GDP, inflation, unemployment numbers, etc.,” which of course keep changing. “So now you have model risk and now you have uncertainty around the data,” he said, arguing that such methods may not produce the appropriate policy path. “As a modeler, in my career as a quant, I find that difficult to accept. I think we need to look at those rules and take those rules seriously. But it would be very difficult to tie the hands of the committee to say one must follow one particular rule, because there could even be an argument over which rule [to follow].”

Lifting ProductivitySiegel raised the question of whether the U.S. could escape its productivity slump. “It could — never say never,” said Harker. “I’m an optimist and I do believe in the creativity of American businesses and of American business leaders.”With the proper support from policy, increased productivity could occur, Harker noted. Productivity has dropped for several reasons, he said, including the shift from high-productivity manufacturing to services. “We are consuming more and more services as we age – that is a secular trend and is not going away.”Harker also listed other factors for declining productivity such as the impact of “aging firms and aging workers” and the slowdown in new business formation. “New businesses tend to have higher productivity,” he explained. “We need to stimulate new business formation and we need to stimulate new workers with the skills necessary for that productivity to occur.” Some “difficult” issues that have to be tackled include immigration, especially as it relates to the demand for high-tech workers, he added. The U.S. also needs to create a more competitive environment “so that we have [a] turnover of firms.” As more productive firms enter the market, there would be winners and losers, and “we need to make sure that occurs.”

The world awaits America’s new social contractWatch for Trump’s vision of what citizens and government owe each other and a deeper philosophy of the respective roles of government and society in driving change

by: Anne-Marie Slaughter

Donald Trump takes office at a moment of American revival, with the income, wages, home values and retirement accounts — as President Barack Obama pointed out in his farewell speech — all growing again. Yet, by social rather than economic measures, America is in the midst of a Great Disintegration. In this respect, the president-elect faces a nation in deep crisis, much as Franklin Roosevelt did amid the Great Depression.Roosevelt updated America’s social contract to bring the nation together and help contain social and economic disintegration. What will Mr Trump do?The bonds that unite America are fraying, according to books such as Charles Murray’s Coming Apart, on the right, or George Packer’s The Unwinding on the left. The middle class is disappearing; institutions such as schools, the army and the assembly line no longer create a well of common experience. Prolonged disconnection is deadly; it rips apart the social fabric.Capturing the magnitude of the crisis confronting the nation in 1932 — with output, employment and global trade down sharply since the Wall Street crash of 1929 — Roosevelt set out on the campaign trail a “greater social contract”. He harked back to the Declaration of Independence as the original contract between the American people and their government, under which “the rulers were accorded power, and the people consented to that power on consideration that they be accorded certain rights”. “The task of statesmanship,” he continued, “has always been the redefinition of these rights in terms of a changing and growing social order.” Accordingly, Roosevelt updated that original contract for a time of financial and social turmoil. The right to life he redefined as “a right to make a comfortable living”. The citizen’s “right to his own property”, he read as the right to keep the property you own, and expanded to a citizen’s “right to be assured, to the fullest extent attainable, in the safety of his savings”. As for liberty and the pursuit of happiness, he said the government has the obligation to maintain “a balance, within which . . . every individual may attain such power as his ability permits, consistent with his assuming the accompanying responsibility”. In 20th-century terms, a right of equal opportunity. Paul Ryan, speaker of the House of Representatives and leader of the rump Republican establishment, understands the scale of the challenge. He defines the “American idea” as a “way of life made possible by our commitment to the principles of freedom and equality — and rooted in our respect for every person’s natural rights”. The task is to preserve “this experiment in liberty”.The differences between Roosevelt and Mr Ryan are instructive, first in their understanding of rights in relation to government. Both believe in natural rights, but Roosevelt believed that what Mr Ryan calls “entitlements” — to evoke a lazy, pampered citizenry — are in fact the foundation of government power. Citizens give government power to protect their rights — to ensure their ability to make a living and keep their savings.Second is the classic Hamiltonian-Jeffersonian divide. Where Roosevelt echoed Alexander Hamilton, emphasising a contract between citizens and government, Mr Ryan puts “society, not government, at the centre of American life”. Government exists to support citizens in solving their own problems. They agree on the imperative of genuinely equal opportunity for all but disagree on the scale and scope of government action necessary to achieve it. Where is Mr Trump in this debate? How will he redefine the social contract for an age in which digitisation, globalisation and artificial intelligence are upending the economy? Will government be catalyst or problem-solver?Like a latter-day Louis XIV, Candidate Trump took a “l’état c’est moi” approach, telling Americans he would fix the country’s ills. Steve Bannon, his chief strategist, calls for “an economic nationalist movement”, “as exciting as the 1930s”, powered by a “trillion-dollar infrastructure plan”. It is far from Mr Ryan’s “simpler, smaller, smarter” government. Mr Bannon understands social divisions; indeed, he helped fan them through the Breitbart News site he ran. He claims to see them more in economic and cultural than racial terms — in the Hamiltonian tradition of strategic protectionism and infrastructure investment; the emphasis on production not consumption. As we listen to Mr Trump’s inaugural address, we should be watching not simply for bold promises to make things better, but for a vision of what citizens and government owe each other. Trying to move in two very different directions at once will produce paralysis.The writer is president of New America and an FT contributing editor

MADRID – The annus horribilis of 2016 is behind us now. But its low points – the United Kingdom’s vote to leave the European Union, the election of Donald Trump as US president, the ongoing atrocities in Syria – were merely symptoms of a process of dissolution of the liberal rules-based global system that began long before. Unfortunately, those symptoms are now accelerating the system’s decline.

For years, the liberal order has been under strain. Perhaps most obvious, there has been a lack of progress in the development of institutions and legal instruments. In short, we have been trying to fit the round pegs of twenty-first-century global power into the square holes of post-World War II institutions.

Skewed representation reflecting a bygone era, whether on the United Nations Security Council or the International Monetary Fund’s Board, undermines global institutions’ legitimacy and ability to respond to new challenges. This has spurred a shift toward informal mechanisms like the G-20 and new, untested institutions like the Asian Infrastructure Investment Bank.

A better approach would aim to boost the representation of emerging economies in existing institutions. It would also seek to incorporate more non-state actors, both civil-society organizations and business representatives, into international decision-making processes.

But the challenge extends beyond the institutional mechanics that have preoccupied most commentators, including me. The liberal international order’s philosophical core has been hollowed out, with fundamental ideas that were once considered staples of the modern world – free trade, democracy, human rights – either in retreat or under threat. Unless and until we recognize and address this reality, the liberal world order that has brought unprecedented peace and prosperity to the world over the past seven decades will continue to erode.

Liberalism and the international order that it has sustained are a product of the Enlightenment. They are rooted in a belief in inexorable human progress, in the notion of a universally shared vision and direction – focused on mastering nature – which rational self-interest dictates should be pursued. In this view, the rule of law, human-rights protections, and trade are mechanisms for propelling humanity forward, even when the road gets bumpy.

Today, our fates are more intertwined than ever, yet the underlying sense that we have a common purpose has been lost, because our ideas about what that purpose should be have been challenged – and even negated. We now know that the resources that support our progress are not unlimited, and that our planet cannot support an ever-growing number of people with the lifestyles that have historically accompanied prosperity.

Universalist mechanisms cannot function properly without a foundation of universal ethics, objectives, and expectations. What they can do is fuel discontent and conflict and, as we have learned in 2016, drive people to reject rationality and deny reality. That is deeply troubling, and it must be addressed.

The first step is a reckoning. Instead of clinging to Enlightenment rhetoric and dogmas, we must recognize the limits of our world, and shift our attention from conquering it toward preserving it. That is the shared vision and direction needed to buttress a new, modern global order.

The next step is an assessment of what, exactly, we should expect from this new reality – and the development of new parameters for measuring success. We cannot suppose that future generations will have more, but we can work for them to have better. To that end, policy should be based not on blunt indicators of aggregate change, such as GDP and net trade data, but on more nuanced metrics that provide a clearer picture of wealth distribution, education, and quality of life.

The third step is to get everyone on the same page. In today’s world, common approaches are essential to address challenges and create new opportunities. No amount of nationalist rhetoric or anti-trade sentiment can change this.

Of course, even without effective international systems underpinned by a universal ethic and purpose, the international community will have to cooperate to tackle challenges as they arise.

But, chances are, such cooperation will come only after a problem has had a sufficiently powerful impact on the perceived interests of individual actors.

The danger here is twofold. First, the absence of universal norms condemns the world to be perpetually reactive. The result is an inefficient and destabilizing crisis-response model – and no constructive vision for the future. Second, and more insidious, the absence of an overarching purpose reinforces a narrow view of self-interest, with decisions made discretely, based on a transactional, rather than a systemic, outlook.

Trump, for one, seems convinced that such an approach is exactly what the world needs. But we know what such self-interested deal-making really produces. Indeed, the consequences of a myopic policy unmoored from values can already be seen, most outrageously in Syria. The brutal siege of Aleppo culminated six years of empty rhetoric and half-measures by Western leaders who seemed to believe that the atrocities of Syria’s civil war did not merit real action.

Syria is an augury of a global dystopia. But our fate need not be so dark. Instead of mourning the liberal world order, as so many seem eager to do, we should be seeking to advance a new, shared purpose that can anchor a truly global system – and guarantee a better future for all.

Advanced industrialized countries have declining populations and need a way to maintain productivity.

By Antonia Colibasanu

Japan's Mitsubishi Research Institute said in its latest report that artificial intelligence will replace 7.4 million jobs and create only 5 million by 2030. At the same time, citing the Boston Consulting Group and AliResearch Institute, Chinese media reports that the digital economy will create about 415 million jobs by 2035, while artificial intelligence will replace an unspecified number of low-skilled and labor-intensive jobs. Both Japan and China are facing demographic challenges that will lead to a decline in the working-age population. And they are not alone. Most advanced economies will see population declines in the coming decades. Europe’s population is set to decrease from about 700 million people today to between 557 and 653 million in 2050, according to United Nations forecasts.This photo taken on Oct. 3, 2016 shows robot-shaped smartphones called "RoBoHoN," developed by Sharp, on display at a press preview of the Combined Exhibition of Advanced Technologies Japan in Chiba, Japan. Asia's largest tech fair is offering a counterpoint to major technology firms pushing the boundaries of artificial intelligence. TORU YAMANAKA/AFP/Getty ImagesThe U.N. also says that between 2000 and 2050, the world's population will grow at a rate of 50 percent. Between 1950 and 2000, the world’s population doubled – from 3 billion to 6 billion. However, population growth decreased in advanced industrial countries. Traditionally, declining population has meant declining power. One of the most important sources of power for countries is their economies. Demographics influence economic growth because they have implications for the labor force, savings, investment and public sector spending. All these relate to economic productivity, which increases due to accumulation of capital, combined with organizational and technological change. This is why finding technological ways to counter declining population is key for maintaining political power, founded on maintaining economic growth.But technological advancement is not government triggered or controlled. Aging populations make robots necessary. Faced with the prospect of a shrinking workforce, companies increase automation and use robots to maintain productivity. They achieve this through constant innovation, which, in turn, supports technological advancement. The use of robotics to increase productivity has been facilitated by the latest revolutionary innovation: the microchip. Since the 1980s, the microchip and computers have been an essential part of reversing the economic stagnation of the ’70s and have been at the center of the digital economy. The fact that the microchip was invented in the United States has been the foundation of America's cultural and economic hegemony. American businesses were the first to use automation in production and distribution processes, helping productivity rise. Since the 2008 financial crisis, U.S. productivity growth has diminished, and while automation is widespread, the perceived stagnation indicates that the microchip industry has aged. Robotization is either not enough or is no longer increasing productivity, since further technological innovation is needed to boost economic productivity again. Robotization has been the solution for declines in productivity and the workforce in countries with aging populations. The latest data released by the International Federation of Robotics indicates that worldwide robot sales increased in 2015 by 15 percent, the highest level ever recorded for one year. Five major markets represented 75 percent of total sales volume of industrial robots in 2015: China, South Korea, Japan, the U.S. and Germany. The industrial robots market is set to grow, and Asia will continue to be the strongest market, followed by Europe and North America. This data confirms that most companies in advanced industrialized countries with aging populations have changed their business models to leverage digitization and decrease their dependence on workers. Therefore, robotization is a response to social and economic conditions. It is used now worldwide, to varying degrees and for different reasons – either due to challenging demographics or the need for increased productivity.Robots have changed the labor market in that the demand for skilled, educated workers has grown and the demand for manual labor has declined. The first generation of robotics used computer programs that could develop a perception of their surroundings and react based on specific instructions. The second generation involved the use of neural network programs, which are based on more sophisticated analysis. The third and fourth generations of robotics function on programs that create representations of the world and other agents, simulating what in psychology is called the “theory of mind” – the understanding that other creatures have thoughts and emotions that affect their behavior. The next generation aims at developing built-in systems that can form representations about themselves, which ultimately means machines will have consciousness. These applications of the microchip turn machines into replacements for the workforce. But not in full. Machines need to be controlled by humans.

Smart, talented human beings are key to managing the digital world of robots so that these robots benefit society. This is why scientists constantly try to find ways to improve quality of life and expand life expectancies. Therefore, developing cybernetic organisms (or cyborgs, for short) is key to solving the demographic problem. Retinal implants and prostheses that replace amputated body parts are some of the first cyborg applications that have improved quality of life. Other artificial intelligence applications are direct brain computer interface implants or memory boosting implants that may cure patients suffering from Parkinson's and Alzheimer's disease or who have had strokes. Restorative technologies, which restore functions to the human body, is the part of cyborgization that is linked directly to solving demographic challenges.Many research projects and initiatives are aimed at going beyond robotization to make sure labor markets support long-term economic development; in this way, they tackle the larger demographic problem. While all these projects are in essence international, with experts from various countries contributing to discussions, most are located in the U.S. There is little information on progress made in this industry in Japan or China, since media reports usually just highlight automation advances that are presented during industry-specific fairs in Asia. However, it is more important that demographic challenges that will define coming decades are met by technological innovation that surpasses microchip applications in automation. Advancements in medicine, natural sciences and information engineering will likely combine to offer the solution.

Happiness has dominated risk markets since early November and despair has characterized global bond markets. Hope for stronger growth via Republican fiscal progress/reduced regulation/and tax reform have encouraged risk. The potential for higher inflation and a more hawkish Federal Reserve lie behind the 100 basis point move in the 10-year Treasury from 1.40% to 2.40% over the same time period. Are risk markets overpriced and Treasuries overyielded? That is a critical question for 2017.The assessment of future growth and associated risk spreads is still uncertain of course. President-elect Trump tweets and markets listen for now, but ultimately their value is dependent on a jump step move from the 2% real GDP growth rate of the past 10 years to a 3%-plus annual advance. Three percent growth rates historically have propelled corporate profits to a somewhat higher clip because of financial and operating leverage dependent on higher growth. Two percent or less typically has smothered corporate profits. The one percentage point difference between two and three is therefore critical. We shall see whether Republican/Trumpian orthodoxy can stimulate an economy that in some ways is at full capacity already. To do so would require a significant advance in investment spending which up until now has taken a backseat to corporate stock buybacks and merger/acquisition related uses of cash flow.I, for one, am skeptical of the 3% and more confident of the 2%. The longer term negatives of my “New Normal” and Larry Summer’s “Secular Stagnation” may have disappeared from the business front pages of the Financial Times and New York Times, but they have never really gone away – Trump or no Trump.Demographic negatives associated with an aging population, high debt/GDP now more at risk due to rising interest rates, technology displacement of human labor, and finally the deceleration/retreat of globalization pose negative ongoing threats to productivity and therefore GDP growth. Trump’s policies may grant a temporary acceleration over the next few years, but a 2% longer term standard is likely in place that will stunt corporate profit growth and slow down risk asset appreciation.The critical question of interest rates and the future level of the 10-year Treasury is equally challenging. While the Fed has begun to tighten policy after abandoning Quantitative Easing several years ago, other major central banks continue to stoke the fire with as much as $150 billion of monthly buybacks. With the pinning of Japanese JGB 10-year yields at near 0% and the ongoing dovishness of Draghi’s ECB, global arbitrage effectively caps the 10-year at 2.4% to 2.6% levels. Currency adjusted yield pickups of 70 basis points by selling 10-year JGB’s or German Bunds and buying U.S. Treasuries, outline the artificial pricing of our 10-year, even as inflation moves higher and short term yields are raised by the Fed once, twice, or three times in the next 12 months.So for 10-year Treasuries, a multiple of influences obscure a rational conclusion that yields must inevitably move higher during Trump’s first year in office. When the fundamentals are confusing, however, technical indicators may come to the rescue and it’s there where a super three decade downward sloping trend line for 10-year yields could be critical. It’s obvious to most observers that 10-year yields have been moving downward since their secular peak in the early 1980s, and at a rather linear rate. Thirty basis point declines on average for the past 30 years have lowered the 10-year from 10% in 1987 to the current 2.40%.Now, however this super strong, frequently tested downward trend line is at risk of being broken; 2.55% to 2.60% is the current “top” of this trend line, and over the past few weeks it has held and reversed lower by 15 basis points or so. And this is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the Dollar/Euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.Gross, a founder of Pimco, is currently manager of the Janus Global Unconstrained Bond fund (JNS).

President Obama once said that as President he aspired to be the progressive Ronald Reagan, and as he prepares to leave office he has succeeded in fundamental if ironic ways.While Reagan left behind a calmer, more optimistic country, Mr. Obama leaves a more divided and rancorous one. While the Gipper helped elect a successor to extend his legacy, Mr. Obama will be succeeded by a man who campaigned to repudiate the President’s agenda. Barack Obama has been a historic President but perhaps not a consequential one.

***

Mr. Obama was always going to be a historic President by dint of his election as the first African-American to hold the office. His victory affirmed the American ideal that anyone can aspire and win political power. This affirmation was all the better because Mr. Obama won in large part thanks to his cool temperament amid the financial crisis and his considerable personal talents.

Yet his Presidency has been a disappointment at home and abroad, a fact ironically underscored by Mr. Obama’s relentless insistence that he has been a success. In his many farewell interviews, he has laid out what he regards as his main achievements: reviving the economy after the Great Recession, a giant step toward national health care, new domestic regulations and a global pact to combat climate change, the Iran nuclear deal, and a world where America is merely one nation among many others in settling global disputes rather than promoting its democratic values.Even on their own terms those achievements look evanescent. Congress has teed up ObamaCare for repeal, and Donald Trump will erase the climate rules. The global climate pact is built on promises without enforcement, and Mr. Trump ran against and won in part on the slow economic recovery. Authoritarians are on the march around the world as they haven’t been since the 1970s, and perhaps the 1930s.

***

These results flow both from the progressive agenda he pursued and the way he tried to implement it. He took power in 2009 with historic Democratic majorities, and he made the mistake of using them to fulfill 40 years of unmet progressive dreams. From his first days he let Democratic Speaker Nancy Pelosi write the stimulus and ObamaCare, to the exclusion of Republicans. “I won,” he famously replied when Eric Cantor asked him to consider Republican economic ideas. The result is that his legislative achievements were built on partisan votes that now make them vulnerable to partisan repeal.Mr. Obama rejected bipartisanship even after he lost Congress—the House in 2010 and Senate in 2014. He walked away from a budget deal with John Boehner in 2011 at the last minute because he wanted more tax increases. In his second term he all but disdained Congress, preferring to rule by regulation. This was a gamble that he could elect a Democratic successor to protect his executive orders, but his immigration and other rules can be erased by Mr. Trump or Congress. By rejecting the hard work of building political consensus, Mr. Obama built much of his legacy on sand.

***

Mr. Obama’s progressive agenda failed most acutely on its core promise of economic “fairness.” The President made income redistribution to address inequality his top policy priority, above economic growth. The result has been the slowest expansion since World War II and even more inequality.Higher taxes and wave after wave of new regulation dampened investment, while expanded entitlements and transfer payments lured more Americans out of the workforce. After the 2009 spending bill failed to spur durable growth, the White House relied almost entirely on the Federal Reserve to prevent another recession. The Fed was able to raise asset prices, which has helped the relatively affluent who own assets, but it couldn’t ignite the broad-based expansion and new business creation to lift average incomes.The Reagan and Bill Clinton expansions left the public in an optimistic mood. Illegal immigration and trade deficits were larger than during the Obama years, but Americans worried less about both because they could see the tide rising for everyone. The slow-growth Obama years created the dry political tinder for Mr. Trump’s campaign against immigration and foreign trade.

***

The story is in many ways even worse on foreign policy. When Reagan left office the Soviet Union was in retreat and the Cold War nearing its end. As Mr. Obama leaves office, the gains of the post-Cold War era are being lost as world disorder spreads. This too flows from Mr. Obama’s progressive worldview. He fulfilled his 2008 campaign promise to reduce America’s global involvement, especially in the Middle East, but his willy-nilly retreat has led to more chaos. He deposed a dictator in Libya but walked away from the aftermath. His decision to leave Iraq let him claim the “tide of war is receding” as he ran for re-election in 2012, but it allowed Islamic State to gestate there and in Syria as he let its civil war burn out of control. The President’s calls for a world without nuclear weapons have been met by the acceleration of nuclear programs in North Korea and Pakistan. A “reset” with Moscow did nothing to alter Vladimir Putin’s revanchism in Ukraine and beyond. Reductions in U.S. military spending have emboldened China to press for regional dominance in East and Southeast Asia.Whether his deal with Iran prevents that country from becoming a nuclear power won’t be known for several years, but it has already helped Iran fund its terrorist proxies in Syria, Lebanon and Yemen. His outreach to Cuba may be historic but so far it has yielded no benefits for the Cuban people.

***

Perhaps the most decisive verdict on the Obama era is the sour public mood. While Americans like and respect the President personally, which explains his approval rating, on Election Day they said by nearly 2 to 1 that the country is on the wrong track. Even race relations, which should have improved under Mr. Obama’s leadership and example, seem to have become worse. His polarizing Presidency has now yielded an equally polarizing successor.The lesson is not that Mr. Obama lacked good intentions or political gifts. Few Presidents have entered office with so much goodwill. The lesson is that progressive policies won’t work when they abjure the realities of economic incentives at home and the necessity of American leadership abroad.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.